Category: technology stocks

A modest recovery in the tech M&A market

Brenon Daly

Contact: Brenon Daly

Spending on tech M&A in July rose about 50% from July 2011, only the second month so far this year where the value of deals around the globe increased from the previous year. In fact, the $20.6bn we tallied last month stands as the busiest July in a half-decade, only slightly trailing the $21.7bn recorded in July 2007.

The boost last month came from the top end of the market, where we saw five transactions valued at more than $1bn. That compares to an average of about three 10-digit deals each month in the first half of 2012.

More broadly, last month saw a number of significant acquisitions, including Dell’s $2.6bn purchase of Quest Software (the company’s second-largest deal); VMware’s high-risk move into networking with the $1.2bn acquisition of pre-revenue startup Nicira Networks; Ingram Micro’s largest-ever transaction, bolstering its mobile offering through the $650m pickup of BrightPoint; and Apple’s first reach for a fellow publicly traded company, AuthenTec.

Of course, even with the acceleration in July, year-to-date spending on deals is still running roughly one-quarter lower than where it was last year. Assuming that level continues through the remainder of the year, 2012 would come in with the lowest total deal value since the recession year of 2009. That would snap the streak of two consecutive years of recovery in the tech M&A market.

2012 monthly activity

Month Deal volume Deal value % change in spending vs. same month, 2011
January 340 $4.1bn Down 65%
February 266 $10.4bn Up 16%
March 292 $16.8bn Down 30%
April 277 $14.1bn Down 47%
May 310 $15.6bn Down 47%
June 291 $13.3bn Down 20%
July 326 $20.5bn Up 49%

Source: The 451 M&A KnowledgeBase

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InronPlanet throws its IPO paperwork on the scrap heap

Brenon Daly

Contact: Brenon Daly

The road to the public market is turning into a dead end for an increasing number of companies. IronPlanet has pulled its IPO paperwork, just days after AVAST Software also scrapped its planned offering. The two companies operate in wildly different markets, with IronPlanet serving as an online marketplace for industrial machinery and AVAST selling security software to consumers. While both cited ‘market conditions’ as the reason for their withdrawals, it’s a bit of a stretch to see it applied to both.

In the case of AVAST, the company almost certainly could have gotten public, if it were willing to take a bit of a discount on its pricing. (AVAST, which was growing at about 40% annually and richly profitable, was nonetheless dinged by concerns over its focus on the consumer, rather than enterprise, market as well as a less-than-robust IPO by fellow European security software provider AVG Technologies.) But rather than cut its value to convince investors to buy into the offering, AVAST will stay private until ‘market conditions’ change.

On the other hand, IronPlanet won’t make it to the Nasdaq anytime soon. Although the company filed its prospectus in March 2010, it hadn’t updated its financials in more than a year. And the numbers it revealed then would have gotten it roughed up on Wall Street. In 2010 (the latest full-year results available), IronPlanet grew just 7%, down from 56% in 2009. (The paltry growth rate continued in the first half of 2011, too.) Meanwhile, IronPlanet has swung to a loss after posting black numbers in the past. That’s clearly not the profile of a company that will appeal to investors, particularly ones that have been burned on their investments in recent IPOs that have posted slowing growth and declining margins.

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Eloqua hits right message at right time

Brenon Daly

Contact: Brenon Daly

The key to marketing is the right message at the right time. And in that regard, marketing automation vendor Eloqua hit both points squarely as it came public on Thursday. The company priced its shares at the high end of its expected range ($11.50 each) and then registered a mid-teen percentage gain in the aftermarket. The IPO created some $420m in market value.

Eloqua’s pitch is fairly simple: Its subscription-based platform makes the sales process for its roughly 1,100 customers more efficient. As corporate budgets continue to flow to marketing, Eloqua has actually been able to accelerate its growth rate as its revenue has increased.

The company was putting up revenue growth in the 30% range in late 2010, but has bumped that up to the 40% range over the past year. (It finished 2011 with sales of $71m, putting it on track for about $100m in sales this year. Assuming it does hit that level, it would represent a doubling of revenue since 2010.)

Wall Street, of course, pays for growth, so Eloqua is delivering the right message on the top line. Further, the revenue is coming in a relatively predictable manner: Eloqua sells only through subscriptions, which is a lot smoother than the traditional big-or-bust license model. Subscriptions account for roughly 90% of total revenue at Eloqua, with another coming 10% from professional services.

The timing of the offering, which has been on file for almost a year, also fits fairly well in the broader market right now. While consumer Internet offerings continue to get roughed up, investors have been supportive of enterprise-focused companies. Eloqua sells primarily to the B2B market, with enterprise customers accounting for about 60% of total revenue, and the remaining 40% coming from SMB customers. Add all that together, and it’s a solid start for Eloqua in its debut.

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Facebook saves faces with Instagram, at least for now

Brenon Daly

Contact: Brenon Daly

There wasn’t much to be wildly bullish about in Facebook’s initial financial report as a public company on July 26. At least that was the view on Wall Street, as shares of the social networking giant slumped around 10% to their lowest level since the mid-May IPO. The one bright spot, however, is the continued stunning growth of Instagram.

Just ahead of the financial release, Instagram indicated 80 million people are now using the photo-sharing application. That’s more than twice the number of users that Instagram had when Facebook announced the acquisition in April. Additionally, some four billion photos have been shared over Instagram.

Of course, it’s important to note that Facebook hasn’t actually closed the acquisition. Moreover, even when it does close, there won’t be much – if any – direct impact on Facebook’s financial statements from Instagram, which is free to use. (The payoff from mobile advertising, which was the primary driver for the acquisition, is some time off for Facebook.)

Not to be cynical, but we couldn’t help but think that there might be (just maybe) something going on behind the scenes around the timing of Instagram’s boastful release. Investors have a much more jaundiced view of CEO Mark Zuckerberg’s impetuous decisions – including his hasty agreement to drop $1bn on Instagram – now that they are losing money on him.

So perhaps it was important for Facebook to show that it is getting an early return on its largest-ever acquisition. That might have been even more important because social gaming company Zynga – whose fortunes are tied to Facebook in many ways – got pummeled on Wall Street after indicating people just aren’t into its games as much as they once were. One specific area of weakness that Zynga indicated: Draw Something, which Zynga picked up as part of its largest-ever acquisition.

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After setting sail for IPO, Avast changes its tack

Brenon Daly

Contact: Brenon Daly

In the half-year leading up to AVAST Software pulling its IPO paperwork on July 25, the market moved steadily against it. A number of high-profile consumer-focused offerings – and, importantly, their subsequent after-market trading – have burned a lot of investors, making them hesitant to buy shares of a security vendor selling entirely to consumers. Additionally, there’s the overhang about the health of Europe, where AVAST has its headquarters and where it still does half its business.

In terms of perception, it also didn’t help AVAST that the IPO of fellow European security software vendor AVG Technologies earlier this year has been a money-loser. AVG priced its shares at the low end of its expected range, and has been underwater since then. The stock is currently changing hands at about $10, one-third lower than where the company initially sold it.

Amid those bearish grumblings on Wall Street, business at AVAST also started to slow. After soaring along with 50% bookings growth in 2011, the pace in the first quarter dipped to 38%. Meanwhile, its margins also ticked lower this year compared with 2011.

Granted, both the revenue growth and the company’s incredibly rich margins are at levels that most companies could only aspire to reach. For instance, AVAST – a company that generates around $100m in bookings with just 207 employees – runs at around a 65% Free Cash Flow (FCF) margin. It currently nets more than $10m each quarter.

But we suspect that business model wouldn’t have gotten much appreciation on Wall Street – at least not initially. If AVAST had gone ahead and priced at the high end of its expected range, it would have debuted at about eight times trailing bookings and 13x trailing FCF. That’s hardly an outrageous valuation, particularly when compared to the rich multiples enterprise-focused vendors have drawn in their recent IPOs. To put a point on that, consider this: at around an $800m debut valuation, AVAST would be worth just one-fifth the amount of the most-recent security IPO, Palo Alto Networks.

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With new CEO at Symantec, is Big Yellow planning a big unwind?

Brenon Daly

Contact: Brenon Daly

Is Big Yellow planning to slim down? That’s the question that was echoing around Wall Street on June 25 after Symantec showed Enrique Salem the door following another lackluster quarterly performance.

Symantec reported fiscal Q1 revenue was essentially flat with the year-earlier period, as its storage and server management unit (the company’s largest single business) actually shrank in Q1. Even when the unit grows, it lags Symantec’s other main business of security. For the full previous fiscal year, the storage business increased just 4%, compared to a 20% rise in security sales.

That discrepancy – along with the fact that Symantec shares have lost about one-third of their value since the security company got into the storage business with its mid-2005 acquisition of Veritas – has prompted calls from investors to unwind Veritas. We understand Symantec has been exploring that option since Salem took the top spot three years ago. One of the more intriguing ideas we heard was Symantec swapping its storage business for the RSA unit at EMC. However, we gather the separation of the units, along with tax implications, made that too complicated.

Incoming CEO Steve Bennett, who has been chairman of Symantec for a year, has indicated that he will review Symantec’s portfolio. Wall Street, of course, read a fair amount into that, as well as the CEO changeover. One source noted that Bennett had overseen a handful of divestitures during his tenure as chief executive of Intuit, including shedding the construction management software unit and unwinding the company’s Blue Ocean acquisition. However, we would characterize those moves as a typical bit of corporate housecleaning – a far cry from the teardown that some investors are calling for at Symantec.

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VMware’s new era with Nicira

Brenon Daly

Contact: Brenon Daly

Having built a business valued in the tens of billions of dollars by virtualizing computing, VMware is now using its largest-ever acquisition in an effort to bring virtualization to networking. VMware will hand over a total of $1.26bn for startup Nicira. It’s a significant gamble for VMware, both strategically and financially.

The purchase is more than three times the size of VMware’s next-largest acquisition, and is roughly equal to the amount the virtualization kingpin has spent on its entire M&A program since parent company EMC spun off a small stake in VMware a half-decade ago. (VMware will cover the cost of the purchase from its treasury. As of the end of June, it held $5.3bn in cash and short-term investments, and it has generated $2bn in free cash flow over the past year.)

VMware has positioned Nicira, a company that only recently emerged from stealth, as a key component of its effort to put software at the core of datacenters. VMware has done that with servers – and to some degree, storage as well – by using software to essentially commodify hardware. It’s an approach that appears to undermine a once-cozy relationship with networking partner Cisco Systems. Incidentally, shares of the switch and router giant are currently at their lowest level in about a year, and it announced another round of layoffs at almost exactly the same time that VMware announced its big networking acquisition.

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Dell’s hard drive into software

Brenon Daly

by Brenon Daly

Dell plans to more than triple the size of its software business in the coming years, underscoring the tech giant’s transition away from its origins as a box maker. The software division is currently running at around $1.5bn, and John Swainson, the recently appointed president of Dell Software, laid out a target of $5bn in sales for the unit. M&A will continue to help move the company toward that target, he added.

In many ways, the transition that Dell is going through is one that IBM has already been through. Indeed, Swainson and a number of other executives (Tom Kendra and Dave Johnson, among others) that are charged with building out Dell’s software portfolio helped do the same thing at Big Blue. Each of the three executives spent a quarter-century at IBM.

Dell has been a steady buyer of software, with all six of its acquisitions so far this year adding to the company’s software portfolio. The largest, of course, is the recently announced $2.5bn purchase of Quest Software, expected to close later this quarter. While that acquisition brought some much-needed heft to Dell’s software portfolio, Quest was viewed by many as a mixed bag of businesses, including some (such as data protection) that directly overlapped with existing Dell products.

For the software business, Swainson also set out the rather ambitious goal of growing it in the ‘mid-teen’ percentage range. Clearly, that was a long-range goal, one that implies a significant acceleration of existing business as well as a regular contribution from acquisitions. Still, the projection seems like a bit of a stretch. Consider that IBM – a model for Dell – has increased revenue in its software business just 2.5% so far this year.

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VHS-era Autodesk stretches in acquisition of mobile video startup Socialcam

Brenon Daly

Contact: Brenon Daly

Autodesk is no Facebook, but the latest deal by the 30-year-old, battle-worn enterprise software vendor looked like it came from the M&A playbook of one of the new generation of tech buyers. In one of the oddest pairings of new and old, Autodesk, which belongs squarely in the VHS era, said it would hand over $60m for one-year-old Socialcam, a mobile video-sharing service that’s sort of an Instagram for videos. Even though the financial impact is muted (Autodesk has $1.5bn – enough to cover an Instagram and a half – in its treasury), the purchase of Socialcam is a huge stretch for the company.

For starters, there’s no clear way for Autodesk, which sells products primarily to engineers, to make money from consumer-focused Socialcam. While Autodesk touts the fact that Socialcam has been downloaded 16 million times, that doesn’t get Autodesk any closer to the $600m in revenue it has to put up every quarter. (Meanwhile, the deal will lower Autodesk’s earnings for the rest of the year, at least on a GAAP basis.) It’s EPS – rather than eyeballs – that’s the relevant financial metric for Autodesk.

Of course, it’s understandable that the explosive growth of Socialcam and other consumer-oriented companies looks tantalizing to Autodesk and other tech giants posting single-digit-percentage revenue increases. However, that M&A enthusiasm needs to be tempered by the fact that getting a return on an acquisition that doesn’t really fit into the existing business model can prove challenging. That’s particularly true with a company like Autodesk that can’t monetize the acquisition by just throwing a bunch of advertisements against the audience that an app like Socialcam has collected. Like we said, Autodesk is no Facebook.

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Mayer leaves M&A-happy Google for M&A-shy Yahoo

Brenon Daly

Contact: Brenon Daly

Well, we have to assume that Marissa Mayer knew what she was doing Monday when she abruptly jumped from Google to take the top job at Yahoo. But one thing we figure she won’t be doing at her new job (at least not right away) is deals. Beyond simply the typical ‘M&A freeze’ that comes with a new boss setting new strategies and processes, Google and Yahoo represent polar opposites when it comes to acquisitions.

Yahoo, which is struggling to find its direction, has been out of the M&A market since last November, when it dropped $270m in cash on interclick. That’s eight months without an acquisition at the onetime Internet search kingpin. When it was healthier, Yahoo would typically do a half-dozen deals or so each year.

During that same eight-month span, Mayer’s now-former employer, Google, announced 11 transactions. And it isn’t just the rapid-fire pace of a deal every three weeks that’s remarkable. It’s also the far-flung variety of the transactions. Since last November, Google has done acquisitions around mobile technology, social networking, online advertising, Web application development and other areas.

And if Mayer needed any more reason to be cautious with M&A when she steps into the corner office at Yahoo, we might recall what happened the last time a high-profile CEO who was brought in to rescue a tech stalwart did a make-or-break acquisition. In many ways, Hewlett-Packard still hasn’t recovered since Leo Apotheker’s $11bn gamble on Autonomy Corp a little more than a year ago. All the more reason we don’t expect Yahoo to be doing big deals anytime soon.

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